Answer:
1. Break-even point in units sold = Fixed cost/Contribution margin
= $1,200,000/$20 = 60,000 units
2-a. First Year Second Year Third Year
Unit variable product costs:
Direct Materials = $20
Direct Labor = $12
Manufacturing Overhead = $4
Product costs $36 $36 $36
Selling and admin. cost $2
Total variable mfg. costs = $38 $38 $38
b. Income Statements:
First Year Second Year Third Year
Sales unit 60,000 50,000 65,000
Sales revenue $3,480,000 $2,900,000 $3,770,000
Variable cost of goods sold:
Manufacturing 2,160,000 1,800,000 2,340,000
Product contribution $1,320,000 $1,100,000 $1,430,000
Selling and administrative 120,000 100,000 130,000
Contribution margin $1,200,000 $1,000,000 $1,300,000
Total fixed costs 1,200,000 1,200,000 1,200,000
Net income $0 ($200,000) $100,000
3. Absorption costing:
First Year Second Year Third Year
Unit product costs:
Variable cost per unit $36 $36 $36
Total variable cost $2,160,000 $2,700,000 $1,440,000
Fixed manufacturing 960,000 960,000 960,000
Total manufacturing $3,120,000 $3,660,000 $2,400,000
Production units 60,000 75,000 40,000
Unit product costs $52 $48.80 $60
b. Income Statements:
First Year Second Year Third Year
Sales unit 60,000 50,000 65,000
Sales revenue $3,480,000 $2,900,000 $3,770,000
Cost of goods sold 3,120,000 2,440,000 3,900,000
Gross profit $360,000 $460,000 ($130,000)
Selling and admin. 240,000 240,000 240,000
Net income (loss) $120,000 $220,000 ($370,000)
4. The net operating income from absorption costing seem counterintuitive. The reason is because of the use of different measures; Requirement 2 is based on variable product costs while requirement 3 is based on absorption product costs.
Explanation:
a) Data and Calculations:
Variable Cost Per Unit:
Manufacturing:
Direct Materials = $20
Direct Labor = $12
Variable Manufacturing Overhead = $4
Variable manufacturing costs = $36
Variable Selling and Administrative = $2
Total variable costs = $38
Fixed costs per year:
Fixed manufacturing overhead = $960,000
Fixed selling and administrative expenses = $240,000
Total fixed costs = $1,200,000
Production and Sales Units
First Year Second Year Third Year
Production units 60,000 75,000 40,000
Sales unit 60,000 50,000 65,000
Selling price per unit = $58
Variable cost per unit = 38
Contribution margin $20
